America enters the dreamland, part of our culture of defeat

Summary: America peaked in 2000. Events since then have sent us on downward trajectory, accelerated by our bad decisions in response. Now the grim reality of future geopolitical and economic problems presses on our imaginations, the end of our hegemonic delusions of power founded on unlimited borrowing at low interest rates. In response we retreat into comfortable dreams. Something will shatter our dreams, probably bad news of an economic or geopolitical nature. That is the nature of dreams, that one must eventually wake. That’s the first step to a stronger America.

Every society experiences defeat in its own way. But the varieties of response within vanquished nations — whether psychological, cultural, or political — conform to a recognizable set of patterns or archetypes that recut across time and national boundaries. A state of unreality — of dreamland — is invariably the first of these.

From the Introduction to Wolfgang Schievelbusch’s The Culture of Defeat – On National Trauma, Mourning, and Recovery (2003)

In 2000 America stood at the top of the world. Economically vibrant, the Federal budget in surplus, the world’s hyperpower in both technology and war. The tech bust, recession, and 9-11 ruined those delusions. Our corporate accounting revealed as bogus, our investment banks as fraudsters — and our assumption of invulnerability shattered. In response we panicked — abandoning both economic prudence, our traditions of liberty, and rational foreign policy.

Why so many mistakes? We fell from grace, becoming just another great power. The shock broke us, and we took refuge in dreamland.

Rather than putting America to work rebuilding our rotting infrastructure, we borrowed trillions for tax cuts to sustain consumption.

Rather than relying on the US law enforcement and judicial system that served us so well during so many crises, we decided to shred the Constitution.

Rather than relying on the structure of multilateral defense and international law we built after WWII, we manufactured lies to justify invasions of two nations (one unrelated to 9-11, the other only marginally related).

Feckless, reckless behavior taken under belief that the laws action and reaction don’t apply to America. Now we see our national debt skyrocketing, failure to achieve our goals in Iraq and Afghanistan, our military deteriorating under the stress of the long war, our global reputation in the mud, and our political regime on its deathbed. Despite this we feel powerful as our debt-powered economy remains hot, and our military remains triumphant over poor peasants across an ever-widening area of the world. We have moved into Dreamland.

“Sooner or later, everyone sits down to a banquet of consequences.”
— Robert Louis Stevenson, no known source (perhaps apocryphal)

This lack of clear vision about our situation might be our greatest illness. We sense this decline, however, as seen in the rising tension erupting as the Tea Party and Occupy Wall Street movements. Our dysfunctional political culture cannot translate this disquiet into coherent and rational alternative policies. Instead the Democratic party adopts the status quo as its mascot and the Republicans sink into madness.

But how will this downward cycle end for us? Will we realize our folly, build a broad consensus for reform, and take the necessary bold actions? Or will retribution, recession, and our accumulated errors combine harshly to pop our delusions? Either way, we must first wake before taking steps to forge a better America.

… the economic buoyancy of 1919-21 was reminiscent of the military and political euphoria after the signing of the Brest-Litovsk treaty and before the beginning of the spring offensive of 1918. Both times, Germans were confronted with the spectacle of what they saw as reality — military victory, the blossoming economy — dissolving into thin air. The analogy can be taken still further since in neither case was the demise physically apparent …

The German perception of reality became unbalanced. Vertigo became the dominant sensation of and metaphor for the period of hyperinflation. … In 1939, Sebastian Haffner, looking back on the hyperinflation of 1923, wrote: “An entire German generation had a spiritual organ removed; an organ that gives human beings constancy, balance, even gravity …”

— Schievelbusch’s The Culture of Defeat – On National Trauma, Mourning,and Recovery

(1) External debts in a foreign currency can cause a depression (which is NOT a collapse), if poorly managed. Greece is a poster child for this. Argentina shows that this problem can be resolved without a depression (or only a short one). The US does not have excessive debts to foreign creditors (as %/gdp), and they are ALL in US dollars.

Whirlwind, collapse is the most impressive but least likely outcome. There are tens of thousands of more likely outcomes. The most likely outcome is that conditions stay essentially the same but get worse slowly enough that the citizens of the US can safely ignore them.

I’ve seen this in Japan with the ‘zombie bank’ based economy that we’ve also adopted. It doesn’t collapse, and it maintains the over-sized fortunes of the paper/electronic-based wealth in the system. But what it isn’t is vibrant — when the greatest financial games are made by gambling and skimming off of the carry trade, what happens is that the rest of the economy becomes sort of superfluous.

Investment should be about making things better for people, but when investment instead becomes about these financial schemes with little benefit for society, I think slowly the physical economy shrinks and the financial/government system grows. Right now there’s still enough residual productivity that the elites don’t really see this.

Give it another decade, you’ll see. I think it’ll be this economy that continues with a lot of familiar names, but no big drama, and somehow the spark of life is gone. More ‘zombie-like’ — is my prediction. It keeps walking but now and then a piece rots and falls off.

George Kennan’s NSC 68 established Military Keynesianism as national policy. “”The issues that face us are momentous, involving the fulfillment or destruction not only of this Republic but of civilization itself.” [op cit.]

When the USSR collapsed and communism permanently its credibility in 1991, the Pentagon, which had by that time become by far the single most important industrial-technological constituency and economic force in America’s industrial base, found itself in crisis.

For several years the U.S. military-industrial-surveillance-prison complex toyed with various surrogate villains to replace the USSR as the “focus of evil in the world” and the “greatest threat Western civilization has ever faced” — Muammar Qaddafi, Manuel Noriega, the central American drug cartels, Somalian warlords, a parade of Balkan strongmen and ethnic murderers like Ratko Mladic, Arkan, and Slobodan Milosevic — but none proved satisfactory.

Then, on 9/11, a magical wonderful glorious thing happened to America’s military: they found themselves a new global enemy again. And not just any enemy, but a mysterious plenipotent protean enemy which could never be clearly identified, never be fully eradicated, and which required an unlimited cash spigot to gush until the end of time in order to Keep American Safe: global terrorism.

The American military-industrial-surveilliance-prison complex, like Boss Tweed, “saw their opportunities, and took ’em.” They staged a soft putsch after 9/11. America today continues with the superficial appearance of a democracy, but all the important decisions are now (and have been for 10 years) made inside the elite intelligence/surveilliance/assassination spook-special forces conference rooms deep in the various fuhrerbunkers like the Department of Homeland Security headquarters (the biggest office building in Washington D.C. — did you know it’s even bigger than the Pentagon?).

All the headlines and congressional debates about cutting welfare or controlling medicare costs are impotent kabuki theather today. The only budget decisions that matter are now made by America’s military men, fighting for who gets the biggest increase in funding for their particular weapons program. If one faction, like the global assassination squads, loses out to, say, the UAV killer drones, then medicare may get a little more funding this year. If not, medicare will get cut.

All important decisions are now made by America’s military. Our civilian personnel have no say in the matter. In effect, America now resides under a regime of mirror-sunglassed colonels, up to an including the death squads beloved of guys like Pinochet. (Obama recently ordered the murder of a U.S. citizen using the American military. If that isn’t a death squad, I don’t know what is.)

Americans continue to talk and act as though we have a civilian government, but we don’t — not really. We’re now ruled by the mirror-sunglassed colonels, just quietly and behind the scenes. Of course, the colonels and generals and military contractors and spooks have convinced themselves they’re doing it for our own good. Like the village, they’ve had to destroy democracy in order to save it.

We have made all these mistakes because the citizens of the United States have little or no civic virtue. Machiavelli even wrote about how the health of a republic depends on the virtue of her citizens. Americans don’t care enough about history to engage in self-government.

Fabius, is there any event that you can see happening soon that wakes us all?

I really do not think they can keep a lid on this: Deleveraging over a long enough timeframe or what some may call Stagflation.

There is too much debt. It is simply surounded by too much precariousness, politically and economically. Too little willingness to reach a sane compromise. And too much lack of future demand. No doubt that the Powerful in the USA expect some sort of social unrest/distress; various mechanism are being placed for such an eventuality.

One more Recession will expose the solvency issues again. We then shall see what avails.

It is not staglflation, which results from a very different set of conditions (such as the US had during the 19709s). It is the opposite of stagflation.

Just like our parents were hung up on WWII (every geopolitical problem was Munich, ever rival was Hitler) and our grandparents on the Depression (the monster under the bed, always ready to jump out and eat us), the boomers yearn to relive the 1970s great inflation. We prefer what we understand, problems we know how to solve. Much like Brad Delong (Prof of economics in Berkeley) said during the 2009-2010 bounce that he was ready to buy two homes in Albany (expensive suburb of San Francisco) — ready to profit from a replay of the 1970s.

This by itself makes inflation difficult to create, and closes it as a useful policy option for the government. The mild post-WWII inflation was unexpected (people expected depressionary deflation), and erased roughly 1/3 of the war debt. Unanticipated inflation is the magic sauce of public policy. With so many — like Breton, crazed gold bugs, hysterical conservatives, and the maniacs at Zero Hedge — forecasting inflation or even hyperinflation, inflationary policies are suicidal. Interest rates would erupt, with the adverse effects faster and larger than the benefits.

“…inflationary policies are suicidal. Interest rates would erupt, with the adverse effects faster and larger than the benefits.”
………..
I agree. So FM what the heck is this deleveraging? Just that? …with no/very low growth.

Although it was written about the beginning of WWII, in the days immediately after September 11, 2001 I often found myself returning to this poem.

“Prescription of Painful Ends” by Robinson Jeffers

Lucretius felt the change of the world in his time, the great republic riding to the height
Whence every road leads downward; Plato in his time watched Athens Dance the down path.
The future is a misted landscape,
no man sees clearly,
but at cyclic turns There is a change felt in the rhythm of events,
as when an exhausted horse Falters and recovers,
then the rhythm of the running hoofbeats is changed:
he will run miles yet,
But he must fall: we have felt it again in our own life time, slip, shift and speed-up
In the gallop of the world; and now perceive that, come peace or war, the progress of Europe and America
Becomes a long process of deterioration — starred with famous Byzantiums and Alexandrias,
Surely — but downward. One desires at such times
To gather the insights of the age summit against future loss,
against the narrowing mind and the tyrants,
The pedants, the mystagogues, the barbarians:
one builds poems for treasuries, time-conscious poems:
Lucretius Sings his great theory of natural origins and of wise conduct;
Plato smiling carves dreams,
bright cells Of incorruptible wax to hive the Greek honey.
Our own time, much greater and far less fortunate,
Has acids for honey, and for fine dreams
The immense vulgarities of misapplied science and de-
caying Christianity: therefore one christens each poem in dutiful
Hope of burning off at least the top layer of time’s uncleanness,
from the acid-bottles.

‘Peaked in 2000’? Not so sure about that. On the economic front if it was a peak is was a bubble built on rotting foundations and debt. The rot had started at least 20 years before and was well set in.

This means that the fruits of improved productivity didn’t go to ordinary people, which it had for the previous 30 years, it went into corporate profits, which then flowed into the 1% (et al). Wages stagnated. It was that from time that the debt explosion started (especially after 1990) as people tried to maintain their standard of living by borrowing (see this chart and others http://www.debtdeflation.com/blogs/2012/03/21/my-paper-for-inets-berlin-2012-conference/)

This created all sorts of systemic changes in the US economy. Stagnant wages put pressure on tax revenues, which was met for a time by the greater tax take from corporate profits, until lobbying reduced corporate and the 1% effective taxes (either directly though lower rates or indirectly through more loopholes).

The finance industry changed to meet this demand, eventually becoming a capable of creating unlimited debt. Especially after it successfully lobbied for deregulation.

Govt revenue (at all levels) came under more and more pressure, they responded by reduced infrastructure spending (usual political short term thinking), cutting expenditure where they could (basically for the politically weak) and increasing their debt.

Other sub-trends added to this, such as, despite stagnant wages and lower corporate taxes, corporations found they could make even more profit by outsourcing production to other countries. Mainly, despite the propaganda, because this enabled tax arbitrage and avoidance, reducing their taxes even more (and hence even more money to the 1%).

This trend went on for some years eating away at the real economic structure. Essentially becoming a machine to destroy the real economy and transfer wealth. And primed the pump for the real explosion.

Bit like a cancer steadily growing away then metastasizing. Yes there were (as for many cancers) some warning signs, but they were ignored. The various regulatory authorities went to sleep or, such as the Federal Reserve, positively welcomed and encouraged it.

In the US it went ballistic in the late 1990s, several speculative booms started up, the housing one started and of course the ‘tech boom’. The financial system could now create enough debt to feed any demand. When the tech boom went under, the Fed poured fuel on the fire and eased monetary policy and the steadily growing housing bubble exploded exponentially (as did some others).

Mortgage debt went from about 50% of GDP in 2000 to 85% in 2007! What was not picked up as much was that other debt exploded in individuals, corporations, local and State Govts as well. Corporations used it to speculate and/or become financial organisations themselves (such as GE or GM) because of the ‘profitability’. Total Private debt (all sources) went from about 175% of GDP in the late 1990’s to peak of 300% in about 2008. Note that many other countries jumped on the bandwagon as well, with the UK being even worse. Check out Steve Keen’s site for many interesting charts on debt, housing, etc (http://www.debtdeflation.com/blogs/).

Every other bad trend accelerated as well. Real investment was crowded out by speculation (bad money forcing out good money). Why invest in (say) a plant that will take 10 years to pay out, when you can speculate on shares, property, et al. Why make things when you can become a financial player yourself (e.g. GE, GM, Boeing, et al). Downward wage pressure kept up relentlessly, now even the middle classes faced stagnant wage growth. Even more tax cuts for the wealthy and corporations. Even more underlying pressure on Govt tax revenues.

While the boom went on all those were masked to a certain extent. Your wages may be going down but look how wealthy you are from your house price growth? Govt tax revenues sort of held up with a bit of smoke and mirrors, gutting of various social security measures, a bit of a run down in defence spending, etc under Clinton, but the underlying trend was still negative. At the State and local areas it was even worse with a lot of issues being hidden by property taxes on the back of the housing boom, cleverly disguised debt and fiddles like overvaluing pension schemes.

Now no economy can take that, let alone one that had hollowed itself out.

And some people did raise the alarm, Steve Keen being one of them but there were quite a few others who looked at the data and were horrified.

When it all went pear shaped (inevitably) Govt response was disastrous. Basically the debt holders were (and continue to be) bailed out, transferring a large part of this stuffed private debt to public debt (Ireland is the poster child of this). To keep their financial sectors alive (life support to be more accurate) most Govts have simply poured cheap money at them Which in turn has enabled the finance sector to start speculating again in a huge way.

Because of this we are now moving from a private debt crisis to a sovereign debt crisis, alongside new speculative debt financed asset booms (especially in commodities).

You couldn’t make this stuff up. Bit like going to a doctor with cirrhosis of the liver after drinking hard for 40 years, and they prescribe free booze.

Now a whole range of countries are in the same boat or even worse than the US, what sort of holds the US up is the fact that it is the reserve currency. Which means they can buy anything from overseas by just printing dollars. The US doesn’t need to earn foreign currency unlike anywhere else. Equally they can fund Wall St (et al) with dollars which can then speculate anywhere else in the World in anything (commodities, property, etc) they want. Essentially exporting speculation (and the associated inflation).

And no one want to change it, because the 1% (etc) are making so much money. Why would they want to?

Now something that can’t continue forever eventually won’t, but it can go on for quite a while, especially if the elites want to keep it going at any cost to everyone else and they can get away with it. But the end is approaching. For the US the day the US dollar stops being the reserve currency will be the day the US will collapse.

And just imagine if Carter and Reagan hadn’t smashed the Unions and wages had (at least sort of) kept pace with productivity growth, and the Finance industry had not been deregulated, then pretty much none of this would happened.

Today, the Reserve Bank of Australia signed a bilateral local currency swap agreement with the People’s Bank of China (PBC). The agreement allows for the exchange of local currencies between the two central banks of up to $A30 billion or CNY 200 billion. It is for an initial period of three years and can be activated by either party.

China has reached agreements on swaps with about 20 countries, but Australia is the biggest and most advanced economy to sign up. And why is this important? Well China chose Australia before much bigger trading partners such as Japan, the US and Europe. And, China approaches its prospective swap partners (and initiates deals on currency convertibility),, not the other way round.

Australia is the trial run with the advanced West. Watch other Western countries approach China for similar arrangements: the biggie would be bilaterals (or the ultimate, a multilateral swap) involving China, the Fed in the US, the ECB in Europe, the Bank of England and the Swiss National Bank, plus the Bank of Japan.

In fact, China is said to be talking to the Bank of England and the Bank of Japan about a similar deal, but the one with Australia was more advanced and was signed on Beijing yesterday by RBA governor Glenn Stevens.

(1) The reserve currency is commonly described by economists as a poisoned chalice, because its long-term effects are determental. The metaphor of “termites” is inappropriate.

(2) The US dollar is overvalued, due to our fetish about a strong dollar. Ending the reserve currency role and allowing it to float to a appropriate level would help the US — and hurt the major exporters with undervalued currencies (eg, China and Germany).

(3) When joining the WTO China committed to a free-traded RMB. These are steps to that. Given how the US has abused its role in the global financial machinery (eg, Iran), China would be nuts to join the current structure.

Agree totally that the $US as a reserve currency hurts ordinary Americans. So? But it does help the military and the finance industry. Ie a lot of the 1%, directly or indirectly.

The recent ‘military adventures’ would not be possible except for the current $US. For example, the UK only got out of the Empire game only because the pound was replaced by the dollar. When it could not pay for the foreign bases it had to close them. It was either that or not having enough to pay for importing food.

The US currently can. No matter what (say) Afghanistan costs in dollars it can (and does) print them. And pay the costs (eg) transport, fuel, et al.

The massive ‘outsourcing’ over the last 20 years would also not have been possible, because for an ordinary country, it would have finally ran out of money (ie Greece for an extreme example).

You are right it is a poisoned chalice, you are right the long term affects are detrimental .. but to who? Not to the people at the top in your society, in fact they have personally benefited and continue to benefit. And they will fight to maintain that.

Take ‘Wall Street’, the big banks get money from the Fed at just about 0%. They can then use that to speculate or buy anything they want anywhere. The $US is accepted everywhere, it is the currency that everything is bought in. So if (say) GS wants to speculate in oil, it can with (basically) unlimited and free money from the Fed. If someone else wants to buy Australian shares, they can, the fact that it drives our dollar up and wipes out huge amounts of jobs here is ‘so what’ to them.

The fact that it stuffs you and me personally is meaningless.

Now China has floated the idea of a Bancor (JMK’s international trading currency), but it has its back to the wall now. Whether you agree or not agree we are at war with China and Russia and Iran. Just the bangs have not yet been reported in your MSM.

The wars, as often the case, are economic and political and behind the scenes .. so far. This era is so similar to 1910 onwards it is not funny.

The only strategies that Russia and China can possibly even survive in are:
(1) Separate the EU from the US by Russia using energy. In this Russia is completely wrong. The EU (and UK) will quite happily self destruct and sacrifice their populations. The EU elites are totally int the US camp (you can speculate all you want about corruption, etc as you want, all I say is read Wikileaks)
(2) Kill the $US as the reserve currency. Now this is China’s strategy. It could work. Except that the US has out manoeuvered it for the moment.

In this case Saudi Arabia is the key.. The day it abandons the $US is the day the $US ends as the reserve currency. But the US will do anything SA wants now. It backs SA extreme Sunni’s everywhere now (yes it stuffed up in Iraq and handed that to the Shiites but learned its lesson finally).

And as long as it does that then the $US will remain.

The fact that this in bizarre means nothing. The US is caught between Israel and SA and appeasing both. The US now (this is well reported) backing AQ and its like (which are all Sunni organisations) in many places. So we bomb some places because there is AQ there and we support other AQ because they are against someone else that Israel or SA has told you they don’t like.

The US doesn’t need a ‘Grand Strategy’ you need psychiatric help.

I predicted on your site years ago that the US elites would go down fighting and they will do anything, and I mean anything, to maintain their ‘masters of the universe’ position.

“But it does help the military and the finance industry. Ie a lot of the 1%, directly or indirectly.”

Not really. Having the reserve currency helps the US military. It’s not clear that it helps the finance industry. It directly hurts US exporters. It hurts, indirectly, most US businesses.

Net, it probably hurts the 1%. Don’t assume the 1% are giant-brained polymaths, able to give Lord Keynes lessons in economics. They’re probably making the same mistake that the UK elites made after WWII and Japan’s elites since the mid-1990s, assuming that a strong currency means a strong nation.